Large Penalty for Refusal to Defend in Bad Faith
February 13, 2017
Insured, Millennium Labs, Inc., brought action against liability insurer, Darwin Select Ins. Co., alleging that the insurer had a duty to defend in two underlying law suits, and that the insurer denied coverage in bad faith. The jury found that the insurer acted in bad faith and rewarded the insured $8.7 million. This case is Millennium Labs., Inc. v. Darwin Select Ins. Co., No. 15-55227, 2017 WL 382345 (9th Cir. Jan. 27, 2017).
The insured had a Miscellaneous Medical Facilities, Professional Employment Practices, and General Liability Insurance Policy from Darwin. The policy covered claims “alleging Personal or Advertising Injury caused by an offense that takes place during the policy period” and defined Personal and Advertising Injury as “injury, other than bodily injury, arising out of . . . oral or written publication, in any manner that slanders or libels a person or organization or disparages a person's or organization's goods, products or services”. The policy's coverage included “the right and duty to defend any such Claim brought against” Millennium Labs. The policy period was listed as December 1, 2011 to December 1, 2012.
In the first underlying action Millennium was sued, and the plaintiff, Ameritox, claimed several wrongdoings, including that Millennium used kickbacks and improper practices to increase its market share to the detriment of the plaintiff. The second underlying action was filed by Millennium against a competitor called Calloway Laboratories, Inc. Despite counterclaims filed by Calloway, summary judgment was granted for Millennium on the counterclaims. Both the claims and the counterclaims were filed before December 1, 2011. The insurer for Millennium prior to December 1, 2011 was Travelers Property and Casualty Co. of Am. After Travelers denied coverage, Millennium informed Darwin of the claims, and Darwin subsequently told Millennium that they would not be providing coverage based on the grounds that the actions did not allege any personal or advertising injury suffered that was covered by the policy.
Under the policy Darwin is required to reimburse Millennium Labs for its defense costs if the suits are even potentially covered by the policy. Millennium Labs bears the burden of proving coverage under the policy, and coverage is interpreted broadly in order to provide the greatest possible protections for the insured. Exclusions are narrowly construed and must be proven by the insurer. For the duty to defend to vest, the insured must only show that the underlying claim may fall within the policy coverage.
Based on the facts that arose in the two underlying cases, the court determined that Darwin had a duty to defend because the claims could have fallen within the policy's coverage for personal and advertising injury. The court also determined that evidence supported a finding that Darwin had acted in bad faith, stating that Darwin never anticipated defending the claims since they assigned the claims to a representative who had very little experience, conducted no investigation, and hired outside counsel in anticipation of litigation.
Editor's Note: Insurers beware. This case is one of several in the recent past where the court has delved out a hefty punishment to the insurer for inappropriate refusal to defend an insured. This trend is continuing to spread, likely because of its tendency to deter other insurers from committing the same wrongdoing in bad faith. In order to avoid having to pay a very high penalty for failure to defend in bad faith, insurers should defend any insured if there is any potential that the claim falls under the effective policy.